Risk Management Is A MUST for Active Traders

You either practice it or you don't…the choice is yours…but the outcome will be wildly polarized!
You’ll either be a successful trader or you’ll join the reigns of those that have washed 
before you and you'll be part of the 95% club! 

With that said, I have two things I want to share with you. One is some insight into how to manage risk,
 the other a solution to your trading needs…

In my opinion, traders should always know when they plan to enter or exit a trade before they execute… It’s like I've also said: “ you need to know all the aspects of the trade BEFORE you enter”. Create your battle plan ahead of time so you're ahead of the expectation curve!

I have historically suggested to community members to read the book “The Art of War”. The book is based on the Chinese military general Sun Tzu, who famously said: "Every battle is won before it is fought." This phrase implies that planning and strategy execution wins wars….or, in our case, produces successful trades more often than not! Similarly, successful traders commonly quote the phrase: "Plan the trade and trade the plan." Just like in war, planning ahead can often mean the difference between success and failure. Simple!

The real focus of this blog though is Risk Management. It’s something that gets all of us at some point in time. The newer traders get hit the most with it and vet traders are humbled by it as a friendly reminder to its importance! If you’re a trader, or wanting to trade, there is NO escaping the importance of risk management!
Just to be completely clear here….risk, in trading, is what you stand to lose if you’re wrong or decide to cut a trade. It’s what I refer to as “at risk capital”. Risk Capital is what you put up for the trade…At Risk Capital is what you stand to lose IF your analysis is wrong!

Trading can be exciting and incredibly profitable if you are able to stay focused, use due diligence, and keep your emotions in check. Still, the best traders need to incorporate risk management practices to prevent losses from getting out of control. Having a strategic and objective approach to cutting losses through stop orders, profit taking is a smart way to stay in the game.

Risk management helps cut down losses. It can also help protect traders' accounts from losing all of its money. Capital risk occurs when traders suffer losses. That is typically a by-product of not managing risk or worse, opening themselves up to unnecessary risk (lowering stops, trying to average down, adding to a losing position etc). If the risk can be managed, traders can open themselves up to making money in the market and more importantly, surviving unforeseen losing streaks!

It is an essential but often overlooked prerequisite to successful trading…and investing for that matter. After all, a trader who has generated substantial profits can lose it all in just one or two bad trades without a proper risk management strategy… I have personally done that. I know wall street traders that have done the same. In fact, when the famed George Soros first retired, he did so on the back of huge gains that he later gave back. That was at a point in time when he was one of the most well respected speculators in the game!
  So how do you develop the best techniques to curb the risks of the market?

A lot of day traders follow what's called the one-percent rule. Basically, this rule of thumb suggests that you should never put more than 1% of your capital or your trading account into a single trade. When I was studying finance the textbook definition of risk said never to put up/risk more than 1-3% of your capital. So if you have $10,000 in your trading account, your position in any given instrument shouldn't be more than $100.This strategy is common for traders who have accounts of less than $100,000—some even go as high as 2% if they can afford it. Many traders whose accounts have higher balances may choose to go with a lower percentage. That's because as the size of your account increases, so too does the position. The best way to keep your losses in check is to keep the rule below 2%—any more and you'll be risking a substantial amount of your trading account.

For me personally I prefer Setting Stop-Loss Points and Take-Profit Points. I have various tools that I use to measure risk vs reward. A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. The point of trading with stops is to stop the bleeding if you’re wrong. Remember the game is more about Capital Preservation…Safe return of capital vs Return on capital…There is a huge difference in mindset! The points are designed to prevent the "it will come back" mentality and limit losses before they escalate. On the other hand, a take profit point is the price at which a trader will sell a stock and take a profit on the trade. Remember, when you have an unrealized profit and your P/L is in the green…you still have risk on. If you have capital working you have exposure to risk! Moving your stoplosses up and putting your capital in a “risk free” situation is never a bad idea, and taking risk off completely at a defined profit zone is also never a bad idea!

Setting stop losses can be done in a number of different ways. It all depends on your strategy and what your trading plan instructs you to do. If you’re day trading or swing trading, setting stop-loss and take-profit points is done using technical analysis. Moving averages represent the most popular way to set stop loss points, as they are easy to calculate and widely tracked by the market. Key moving averages include the 20-, 50-, 100- and 200-day averages. Those are the Moving Averages that are the most watched on ALL timeframes. If you’re day trading you might want to think about incorporating the VWAP. These are best set by applying them to a stock's chart and determining whether the stock price has reacted to them in the past as either a support or resistance level.
Another great way to place stop-loss or take-profit levels is on support or resistance trend lines. Support and Resistance are what I like to refer to as areas of structure. These can be drawn by connecting previous highs or lows that occurred on significant, above-average volume. Like with moving averages, the key is determining levels at which the price reacts to the trend lines and, of course, on high volume.

At the end of the day…the real name of the game is managing risk. If a trader cant or wont manage risk, the market won't let them stick around too long. #FACTS

If you’re new to trading or are struggling with the learning curve and want to learn more about well tested and viable trading strategies with risk management being put in front of everything you need to watch this video

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